What are Net Assets?

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Below is the Net asset FormulaThe Net Asset FormulaThe net asset formula evaluates the company’s total assets surplus or deficit over its total liabilities. It determines the company’s net worth or value which is an indicator of its financial health.read more

Let us calculate this for Colgate in 2014.

  • Total Assets in 2014 (Colgate) = $13,459 millionTotal Liabilites in 2014 (Colgate) = $12,074 million

Net Assets = Total Assets in 2014 – Total Liabilities in 2014

= $13,459 million – $12,074 million = $1,385 million

Net Assets Example

Your Balance Sheet (the positional statement) is equally balanced between assets and liabilities.

  • From the above basic account format of the balance sheetFormat Of The Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more, we can observe that the balance sheet is divided into Assets and Liabilities and Shareholders EquityShareholders EquityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders’ Equity Statement on the balance sheet details the change in the value of shareholder’s equity from the beginning to the end of an accounting period.read more.

  • If every item on the balance sheet is correctly listed, the Total Assets must equal the Total Liability and Shareholder’s Equities.Remember, our Net Worth equals the difference between Total Assets and Total Liabilities. It leaves us with the Shareholder’s Equity.So we can say that It is similar to Shareholder’s Equity.

Increasing Net Assets Example

Decreasing Net Assets Example

Sears Holding, however, is a classic example of the decrease in Assets over some time. Sears has been reporting continuous losses resulting in the negative book value of the firm.

Net Assets for Individuals

Recently, Chris Larsen (co-founder) of cryptocurrencyCryptocurrencyCryptocurrency refers to a technology that acts as a medium for facilitating the conduct of different financial transactions which are safe and secure. It is one of the tradable digital forms of money, allowing the person to send or receive the money from the other party without any help of the third party service.read more company Ripple has become the fifth wealthiest person in terms of net worth. Now that we understand what the company’s net worth is, let us calculate it in the case of an individual.

source: fortune.com

From an individual’s perspective, net assetsNet AssetsNet Fixed Assets is a financial metric used to calculate the overall value of a firm’s fixed assets. You can calculate it by deducting the total depreciation or liabilities from the total amount paid for all the fixed assets. read more mean the difference between how much a person owns and how much she owes. To improve your financial health, your assets must be positively high.

Remember, your earnings do not reflect your true financial health. Let’s take the example of two different people to make it clear.

  • Ram earns Rs 45000/- per month while its expenses and liabilities (like monthly bills, installment of home loan/car loan, credit card liabilities, etc., total a sum of Rs 47000/-). The financial health of Ram is said to be poor, as his Net worth is negative, and nothing is left to invest.On the other hand, Shyam earns Rs 18000/- per month only. He acquires zero liability and invests most of his income in assets like mutual funds Financial situation of Shyam, without a doubt, is healthier than that of Ram’s.

So from the above example, it becomes clear that:

  • Your financial health is mainly decided by what net worth you own.Earnings are important to use your earned money to make more money.Investment in assets helps secure your net worth.

Conclusion

Net assets are a simple way to identify the health of the company and an individual. If your company earnings are increasing, but your assets are also decreasing, your company’s health might not be improving.

This has been a guide to Net Assets and its definition. Here we discuss examples of Net Assets for a company and an individual, along with a detailed explanation. You can learn more about accounting from the following articles –

  • RONATypes of Financial RatiosTangible Net Worth FormulaNet Cash